ERI Scientific Beta releases a series of single narrow high factor exposure indices

ERI Scientific Beta has announced the commercialisation of a new series of single narrow high factor exposure indices. These narrow smart factor indices have strong exposure to the desired factor tilt but are nevertheless well diversified through the application of a multi-strategy weighting scheme, thus remaining consistent with the Smart Beta 2.0 approach developed by EDHEC-Risk Institute and ERI Scientific Beta. The Smart Beta 2.0 framework provides the benefits of explicit control of the risk factors to which one wishes to be exposed with a selection of stocks exposed to the selected factor (beta) and diversifies the specific or unrewarded risks associated with this stock selection.

In addition, these indices benefit from the application of a High Factor Exposure filter, which strengthens their overall factor intensity while avoiding these single smart factor indices, which correspond to explicit choices of strong exposure to factors, being negatively exposed to other factors. For a given factor tilt, this filter enables the stocks that have very poor exposures to other rewarded factors (multi-factor losers) to be eliminated.

The narrow smart factor indices therefore provide more pronounced factor exposure at the single factor level and can be used in allocation solutions, notably in the case of factor overlay, because these indices:

1. Significantly strengthen the allocation of the overall portfolio to the selected risk factor through the strong exposure to this factor
2. Avoid altering the exposures to the other rewarded factors and preserve a very good level of factor intensity through the presence of the high factor exposure filter

As such, on the occasion of their commercial launch, Professor Noël Amenc, CEO of ERI Scientific Beta, stated, "These indices, which we have been using since December 2016 for dedicated factor allocation solutions, correspond to two main usages in the factor overlay framework. They either allow the value of a tactical bet on a factor to be maximised or the factor biases of a pre-existing allocation to be corrected in a highly efficient way."

The diversification of the indices leads to excellent risk-adjusted performance, and they have interesting asymmetrical properties: not only do they outperform traditional factor indices when these indices perform positively, but they also limit the losses when these indices perform negatively.

As part of its policy of transferring know-how to the industry, EDHEC-Risk Institute has set up ERI Scientific Beta. ERI Scientific Beta is an original initiative which aims to favour the adoption of the latest advances in smart beta design and implementation by the whole investment industry. Its academic origin provides the foundation for its strategy: offer, in the best economic conditions possible, the smart beta solutions that are most proven scientifically with full transparency of both the methods and the associated risks.
ERI Scientific Beta, 1 George Street, #15-02, Singapore 049145. For further information, please contact: [email protected], Web: www.scientificbeta.com.

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